How VAT is Improved Because of the TRAIN Law

How did the Train Law improve VAT?

54 out of 61 special laws with non-essential VAT exemptions have been repealed.

The government is stricter with enterprises filing for VAT zero rating.

Changes in the VAT refund system.

The Philippines has one of the highest VAT rates in the world and it is definitely a burden for a lot of enterprises. Recently, the government made revisions to it through TRAIN Law to make it less painful for them.

If you’ve recently used your updated tax calculator in the Philippines, you’d notice that enterprises are not the only ones benefiting. Small businesses and freelancers will also experience the change. To learn more about this, continue reading below.

Some products have been recently exempted from VAT

A number of goods and services are now exempted from VAT. The government has deemed their importance to society. Thus, they are lessening the taxes that they are receiving. Some of these products are:

Houses that cost P3 million or less.

Socialized housing priced around P450,000 or lower (government or privately own housing projects meant for the homeless and low-income citizens).

Diabetes, cholesterol, and hypertension medicines (the VAT exemption for these will apply on 2019).

A few corporations and organizations are also added to this list.

Businesses that are earning P3 million or less in sales annually.

Government agencies

Corporations under the government

State universities

54 out of 61 special laws with non-essential VAT exemptions have been repealed

This action was done for the sake of making the VAT exemption system fairer and less confusing. The administration admitted that a lot of high-income earners, who were receiving VAT exemptions, did not deserve them because the products they offered were non-essential items. A few examples of these include published magazines, professional instruments, and many more.

By removing the special laws concerning non-essential items, people with lower income will have more advantages. The government will be getting VAT from high-income earners instead.

The essential products and services that are still exempt from VAT are the following:

Tourism

Cooperatives

Agriculture

Food

Renewable energy

Health

Monthly rents and leases which cost less than P15,000

Businesses and Business Process Outsourcing companies operating in special economic zones

In addition, individuals with disabilities and senior citizens are still exempt from VAT.

The government is stricter with enterprises filing for VAT zero-rating

The Philippine Economic Zone Authority (PEZA) always aimed to entice foreigners to invest in local businesses through the use of economic tools. One of these tools was tax exemptions. This meant that the government was exempting these businesses from direct and indirect taxes—including VAT.

Since VAT was only meant to be applied to products and services for local consumption, it would make sense that goods meant for foreigners should not be subject to this tax.

Since 2009, export sales under PEZA businesses had VAT zero-rating. This meant that the 12% VAT rate would not be imposed on the buyers of these PEZA sellers, inside and outside of the Philippines. Instead, it is passed onto the suppliers.

This VAT rate was only for “direct exporters” who could prove that they were doing business outside of the Philippines. However, the definition for direct exporters was not made clear.

Now, thanks to TRAIN Law, the government was able to make some changes to its definition. According to them, direction exporters are the following:

Organizations within tourism enterprise zones as declared by the Tourism Infrastructure and Enterprise Zone Authority (TIEZA).

Enterprises within a separate customs territory as provided under special laws.

As a result, only the correct enterprises are able to file for a VAT zero-rating.

Changes in the VAT refund system

Every business has their output VAT and input VAT. Output VAT refers to the tax your customers pay whenever they buy your goods and services. Input VAT, on the other hand, refers to the amount you pay when you buy goods and services from your suppliers.

In general, businesses should have more output VAT than input VAT. However, this is untrue for enterprises that make use of zero-rate VAT. This is because they operate outside the Philippines.

Since they can’t get VAT remittances through sales transactions, their input tax frequently outnumbers their output tax liabilities. This puts them at an unfair position compared to enterprises that solely service the local community.

The government recognizes their disadvantage. Thus, they came out with a VAT refund system for these specific types of taxpayers. According to the Tax Code of the Philippines, they can apply for a refund for the excess of input tax credits. They just need to appeal to their Revenue District Office (RDO) or Large Taxpayers District Office—both of which have jurisdiction over them.

With TRAIN, the current administration aims to make VAT refunds faster for these taxpayers. They changed the process by reducing the time for the BIR to accept refund applications from 120 to 90 days. Also, the BIR is now required to write legal and factual reasons explaining why they rejected a refund application.

Key Takeaway

In the Philippines, enterprises often saw VAT as a burden. But recently, the government made changes to it to improve the whole system for everyone.

These changes include giving deserving products VAT exemption while repealing it from non-essential items. Additionally, they became stricter when it comes to the VAT zero-rating. They also came up with new rules to make the VAT refund system more efficient.

Author Evan Tan

Evan Tan is the Chief Marketing Officer of Taxumo. He is a communications professional with over a decade of local and regional professional experience. He also is a founding member of the Philippine LGBT Chamber of Commerce. Apart from his work and advocacy, he is passionate about traveling, working out, reading good books, and discovering vegan restaurants in and out of the country.